Owners Retain Company Control
Suppose from the outset a company gets financed in a different manner. Suppose outside money is not given ownership shares with voting rights, but instead obtains a minor slice of company revenues, much like a sales tax or a levy paid by a franchisee to a franchisor.
Revenues rather than profitability would be the focus for these outsiders. Company executives could then not be threatened with replacement by bullying financiers, because they would control the voting shares.
Should revenues slump, then new ways, new products, or new blood might be needed, but unwelcome attention from financial sharks would hardly be a concern, …as a hostile takeover would be difficult to arrange.
It is notorious that very often new ways and new products are championed by small startups rather than by large established companies.
It has ever been thus. ..Yet, in order to produce at any significant scale requires money that most startups conspicuously lack. And due to the manner in which companies are typically formed and attract money, the entrepreneurial small outfit will often (sooner or later) get swallowed by a whale or attacked by a shark. ..Then the founders get ousted.
Corporate capitalism reinforces its position of dominance by such acquisitions. Break this cycle and big corporate capitalism would not long remain the absurd dance of the behemoths that it has become: ..for upstarts grown in size would muscle in. More players, and more on offer to buyers, would be one result.
Nor would companies remain the playthings of greedy financiers, gobbling up whatever they can with an aim of near~term gains ….before they move on to the next deal, the next attack, a new victim, another meal. ..The financially weak get pillaged, dismembered, reduced, re:arranged, and resold…..next! _[There’s a word for all this, and that word is rapine.]
What is the morality of finance?
What, indeed? __Why should backing a company with money alone entitle the backer to part ownership in that company? After all, is not the minor ‘investor’, the petty player, backing a company much as said punter* would bet on a horse in a race?
In British usage punter is generalised and may refer to customers or clients of any sort who are small fry, like most who as individuals trade in — gamble, really — relatively small amounts in shares of companies listed on a stock exchange. ..The punter is naturally hopeful of placing a winning bet, but is in no sense personally invested in the well~being of any company bet on, any more than he would be in the well~being of a horse bet on in a race.
{* That word is likely after Parisian slang for bettors of small amounts who would gather on some bridges (ponts), hence referred to as ponters.}
Even Adam Smith noted that most shareholders __ “seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, do not trouble themselves about it, but receive contentedly such half~yearly or yearly dividend as the directors think proper to make to them.” (Wealth of Nations, Book Five; chapter One; part3; article1… about half way in).__ {It’s a big book.}
So why confer part ownership on minor backers of a company? They certainly don’t act like owners. ..Such backers are opportunists and often flighty — a company’s ongoing health is of scant, or no, concern for them.
Minor of course is a relative concept. _For a company with a total capitalisation of 5o million$, even 50k$ is but 0.001 of the total and therefore minor. ..The same holds true for a half million dollar contribution to a company with a ‘cap’ of 500 million$. _ Generally speaking, then, few who contribute only money to such companies are other than minor players — or punters, so to speak.
Alternative Finance
An Alternative: ..That for contributing money one gets a thin slice of company revenues — not of profits. In effect, it is akin to a revenue tax paid to financiers, with no ownership entitlement attached, for such is not needed ….provided said tax is reliably paid, with some means of enforcement to assure this [said enforcement not to include voting rights].
As a practical convenience, the new company might sign a revenue~sharing agreement with a financial outfit, who would then market participation units (shares) of this ‘revenue fund’ to the punters.
No doubt any such fund would include this type of income from many such companies, either a mixed bag of them or all from one sector of an economy — in one country or part of a country, or from several. Thus the financial outfit handles ‘investor relations’ and units in the revenue fund trade openly amongst the betting public, prominent among whom are the managers of pension funds and of mutual funds. Basically the same crowd who play the stock market.
With this style of funding prevalent, each such company would be tightly controlled by a small group who hold the voting shares, basically its founders or their successors.
Financial pirates (parasites) would be shut out, and consolidations would become much harder to accomplish. ..The corporate landscape would be changed, with most industries soon having more players who are significant than at present. ..Competition in the variety of what is on offer, and on what terms, would soon be greater, with even real competitive pricing likely to arise more often.
More goods coming to market would see some failing to catch the public’s fancy, instead becoming remaindered at deep discounts, so even those who shop the low end of the retail market in discount stores would also benefit.
Truly, does this not seem more like the competitive marketplace fabled in standard economic theory? ..The choice otherwise, by default, is continued control of corporations by a relatively tiny group of multi~billionaires. ..Is this what Economics theory amounts to — servility to plutocrats?
Those who favour greater competition should welcome this change in company finance. Indeed, they should advocate for it.
Counterfactual Scenario
In the realm of alternate histories, counterfactual histories, the playing with “what if” scenarios, one such in respect of finance is very simple.
It struck me that a mistake was made in the early history of company financing which has resulted in today’s deleterious control of industry by financiers, and the extraordinary concentration of wealth resulting therefrom. For surely, finance is only meant to facilitate industry – not control it. Fortunately, this can over time be undone.
It would have taken somewhat exceptional insight to have avoided the mistake made, and arguably any alternative path might not have seemed reasonable at the time: …Yet, an alternative path was possible that would not have led to our current situation as regards ownership of industry.
It would have denied financiers control of industry to the extent it is now exercised, or at least the extent of such control of so much by so few would be very markedly less. As to how a path to that outcome is within our grasp today, a little farther on this will be explained.
But as for a ‘what if’ scenario that could have played out back then, back when company finance was very new …What if the reasoning then had fallen along the following lines:
Considering a horse race, the punters placing bets on the outcome do not expect to obtain part ownership of any horse they favour. Yet, punters betting on a company’s performance do get a claim of part ownership.
Why is that? ..How is laying one sort of purely financial bet significantly different than the other?
{Note that this refers to no one active in the business, but only to punters greedy for gain who are content to contribute money and naught else (save, perhaps, for advice of dubious worth).}
Prior to the routine incorporation of companies
At first, the typical way to fund a business endeavour was to take on partners. A claim to part of the profits then fell to any such partner, even those who merely provided cash.
The mistake was in regarding such ‘investors’ as owners — particularly when the number of them became large, even unwieldly — since many were clearly no more personally invested in the health of the business than any punter betting on a horse race would be interested in the future health of that horse.
Of course, those punters could be fairly certain of receiving a payout should the horse they backed win the race. …And there’s the rub:
For those initiating a business ordinarily are intent on its improvement and growth, and to such ends have several good uses for any money available. ..Typically, the active partners would rather retain most profits rather than pay them out, whereas many partners who only provided cash were expecting an annual return and would demand dividends. ..Thus the issue of ownership came into play.
Money-only partners sought assurance of a payout and might only contribute where their ilk could outvote management (if need be) in order to obtain what they considered their due.
Nowadays, of course, the price of shares rather than dividends is largely the focus, but still …. Attaching ownership rights to a punter’s gamble on the success of a business has had serious adverse consequences ever since.
Another Model
Had the model instead been that of a fishing vessel, or of one engaged in whaling, matters would have been much different.
Fishing is risky, the size of catch uncertain, and the price obtainable uncertain too. So rather than commit to firm payments to the crew, captains usually offered instead a share of each trip’s catch. ..This also assured a good group effort to obtain a big catch, since each and all would benefit. Naturally, the captain got the largest share since he was providing the boat, equipment and leadership.
Notice that this is in effect a share of revenues, hence unrelated to the profitability of the venture, considering each trip as a venture.
Had money partners in a business venture been rewarded similarly with a slice of the revenues — such revenue shares being devoid of any pretense of having ownership in the business — history would have played out much differently than it has.
Extreme concentration of industry and the oversight of it by essentially parasitic financiers simply could not have arisen. ..For when funds may be raised without giving up any ownership, as with the use of revenue shares, the principals retain control of their business no matter what. ..Of course they may go bankrupt, but they could not unwillingly be ousted, at least not easily.
It should be possible to embark on this path even today in many jurisdictions, for company law is often such as to accommodate this sort of arrangement. Special legislation would not be required in most places. ( Finance by Revenue Sharing)
Then again ….
Look at this another way: Consider a franchise outlet located in a shopping mall. Very likely, as is typical of most franchise arrangements, a small slice of its sales income will go to the franchisor, and another small slice may be an obligatory contribution to advertising of the franchise as a brand. Yet another small slice of income may be owed the mall company, as written into the tenancy contract. And usually sales tax will be collected by the retailer on behalf of one or more levels of government.
So then part of what the customer pays passes from the retailer to its franchisor, perhaps also to its landlord, and to government. Sharing its revenue, small bites of it, is the reality such a franchisee must live with. And all this sharing is before employees and suppliers are paid; all these little nibbles from its revenue are owed whether or not the outlet turns a profit.
It would hardly strike such a franchise retailer as anything exceptional or peculiar if yet another small slice of its revenues was owed to someone else — such as investors in the company.
Or more precisely: ..owed to buyers of the right to a small slice of its revenues, whether it be non~voting revenue shares of the company itself, or to a financial concern offering revenue trust units to the public.
Revenue shares need no voting rights attached, for whatever source of revenue they refer to, the shareholder gets a slice thereof as long as that revenue continues to roll in — heedless of profitability, regardless of any mismanagement or adverse circumstance.
Ordinary shareholders should be so fortunate: …they are entitled to part of the profits, disbursed in theory as dividends on their shares, though that is subject to management whim and manipulation. Which is why holders of ordinary shares need voting rights as a potential cudgel to beat management with. Revenue shareholders have their binding contract, with resort to the courts of law should payments be withheld, be unduly late, or be too small.
Revenue sharing, in the form of sharing the catch, was fairly common as a means of rewarding crew in fishing and whaling. How much of a share each member was to get was agreed beforehand, and woe to the captain who cheated on it afterward. Pirates typically worked the same way with the same incentive agreed beforehand of a share of any capture. __“Aargh, ye mateys, will ye join me in this venture?”
What was good enough for the pirates of olde surely should be adequate for the punters of today: ___ “Care to invest in a slice of our income?”
Pension Funds
Punter is a very English word. It labels those betting small amounts on horse races and such, and especially for an inveterate bettor or gambler. It has been generalised and applied to customers of places other than betting shops, and typically for the sort of customer no more highly esteemed than the small~stakes gambler. Pawn shop owners might refer to their clientele as punters, as instance, as might dealers in old used cars.
The polite euphemism for playing the stock market is investment. Yet, that is not what most players do: ..their behaviour says otherwise.
Investment is putting money into something with the expectation of participating in the profits. Earning dividends on a stock might be termed investment; earning interest on a bond may be termed investment; but buying stocks or shares in the expectation of their rising in value is speculation. Speculation is a gamble, not an investment. Most players are punters, not investors.
This distinction raises a very interesting question: What should managers of pension funds be — punters or investors, speculators or something more prudent?
The money they manage, after all, is meant to provide income for retired persons. That managers of pension funds might speculate with it hardly seems proper. Yet today they do so constantly as a matter of routine, and like the officers on the bridge of the Titanic they seem blithely unaware of any serious danger.
Pension funds are currently allowed to hold common or ordinary shares of companies, which they commonly do without regard to anything like an adequate dividend being paid.
Such a purchase is not an investment, not done in order to participate in whatever profits the company might have. Not at all. Any dividends these shares or stocks pay are generally paltry, more of a gesture than a genuine distribution of profits.
Such shares are bought in anticipation of their price rising: Which is the behaviour of a punter, placing bets and chancing the outcomes.
But ought pension fund managers be allowed to behave in this way? Time was, several decades past, when they could not. Perhaps it is time to give the matter serious reconsideration.
Pension funds could, after all, be restricted to purchasing only such common shares as do consistently pay adequate dividends, dividends that well exceed the returns from long-term gov’t bonds. Legislation concerning this could be enacted: It only takes political will.
Such legislation would definitely have an effect, for a great whack of money that currently chases any sort of ordinary stock would suddenly be seeking only those common shares paying decent dividends. Though not that many at present, they would soon enough become commonplace in response to insistent demand. *
Meanwhile, demand for the other sort of common shares would be lessened by taking pension funds out of the chase. Their prices might then be somewhat less buoyant and instead tend to stagnate at times: For the only thing that keeps them buoyant is more buying than selling. But a stock that does not seem likely to rise may induce the selling of it, and a drifting or dropping share price is not what its company executives would want.
Due to this, the overall focus would fall on those common shares that do pay regular dividends of a size today thought generous. Which would be a good thing for our economy overall, as well as a more prudent way to invest pension fund monies. Extension of similar legislation to what mutual funds are eligible for RSP investments would seem natural, Wouldn’t anyone prefer to see dividends of decent size piling up in their Retirement Savings Plan accounts? Even some mutual funds ineligible for RSP status might specialise in such shares in large degree.
__* Also, such shares should carry extraordinary voting rights — say twenty votes per share — to come into force whenever two dividends due went either unpaid or were inadequate: ..that is, less than required by the legislation. Otherwise, the shares would carry no voting privilege.
In this way, such shares would be a potent threat to any management inclined to skip or skimp on a dividend, for these shares would become very attractive to corporate raiders as soon as one dividend was missed and the time for another drew nigh.
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There is nothing recent about the opinion that too much concentration of wealth is not good for society overall. In fact, caution in this regard was pointed out by Francis Bacon much earlier, stating:
“Above all else, it is good policy that treasures and monies in a state be not gathered in few hands. This may be done chiefly by suppressing — or at least restraining — the devouring trades of usury, ingrossing, and the like. … For money is like muck, not good except it be spread.” __ written ~1610, the essay: Of Seditions and Troubles.
Usury was excessive financing charges, while ingrossing meant buying up a supply of something essential in order to demand a high price for it. The most frequent example here would have been wheat. ..Muck refers to a melange of shit and straw to be spread on a field to fertilise the next crop grown.
A large pile of it is of no use, nor would be a large pile of gold or silver coins: Spread it around was Bacon’s advice.